Bank of England: Four in a row

02 February 2024

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 1 February 2024. Past performance is never a guarantee of future performance.

It may have been the first Monetary Policy Committee (MPC) meeting of the year, but the Bank of England (BoE) held the base rate at 5.25% for the fourth time in a row. In an unusual development, the vote was split three ways. 

While borrowers will be disappointed that the wait goes on for interest rate cuts, there is at least a broad market consensus that peak inflation has been reached. 

The Bank of England has again erred on the side of caution, opting against a premature rate cut that risks re-igniting the inflation fire.  

A global problem

Inflation left an ugly scar on the global economy in 2023, with key central banks all opting to unleash a barrage of monetary policy in response. In the last two weeks, the US Federal Reserve (Fed), the European Central Bank (ECB) and the BoE have all voted to keep their respective rates on hold. 

An interesting transatlantic dynamic is now emerging – while the US and UK may be looking at rate cuts in Spring, Europeans are expected to have to wait until summer. Why is the ECB delaying? Put simply, it doesn’t think the time is right. Despite the region’s economy offering tepid growth prospects in 2024, and being in desperate need of a boost, policymakers don’t want to rush their cutting cycle. In the crystal-clear words of ECB President Christine Lagarde: “(It is) premature to discuss rate cuts…We need to be further along in the disinflation process1.”

Meanwhile, the doom-defying US economy continues to hold-up well, with more new jobs recorded in January’s employment data. There’s a growing belief that the much-hoped-for economic ‘soft landing’ has in fact been achieved. While the Fed is still some way off its 2% inflation target, and is keeping rates at 5.25%-5.5%, there is growing optimism that rate cuts are closer than ever. 

Curveball alert 

As much as inflation may finally be receding, there remains a lingering shadow of uncertainty overhanging UK economy. This was reflected in the differing views among MPC members, with two voting for a rate hike, and another for a rate cut.

As the meeting minutes stated, “Although services price inflation and wage growth had fallen by somewhat more than had been expected, key indicators of inflation persistence remained elevated. There were questions, on which further evidence would be required, about how entrenched this persistence would be, and therefore about how long the current level of Bank Rate would need to be2.”

And although financial markets tend to weather geopolitical events well in the long run, the recent tension in the Middle East is being closely watched by investors and policymakers. If an increasingly hostile Red Sea leads to more trade being re-directed around South Africa, then there is a chance supply constraints may nudge global prices back up. 

Interestingly, oil prices – key for inflation, and sensitive to regional flare-ups – have remained relatively calm, with seemingly little knock-on effect on inflation data (for now at least).

UK domestic pressures

This year is also (likely) an election year in the UK, which means the BoE and the Government – two sides who operate independently of one another – will be acutely aware of the timing of their actions in 2024.

For the latter, there is a growing belief that tax cuts need to be dangled in front of an unhappy electorate, if Labour’s predicted win is to be avoided. 

The question now is whether Jeremy Hunt, or the UK economy, can afford to wait any longer for some stimulus. If the Chancellor believes he can put money back in people’s pockets, without unwinding the progress made by the team on Threadneedle Street, then tax cuts of some form are to be expected in March.  

In summary

The decision to hold the base rate at 5.25% was widely expected. It mirrored the earlier actions of the Fed and the ECB, and there was wide-spread market belief that the MPC would keep things as they were. 

However, the clamours for cuts will increase in the coming months if inflation recedes. However, central bank, have been clear to markets that they won’t be rushed. 

BoE Governor Andrew Bailey offered this synopsis: “We have had some good news over the past few months. Inflation has fallen a long way, from 10% a year ago, to 4% now. Things are moving in the right direction but we have to be more confident that inflation will fall all the way back to the 2% target – and stay there. We're not yet at the point where we can lower interest rates3.”

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